Economists’ estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain.

'Revenue will increase because demand is inelastic. It means that consumers are less sensitive to changes in price. They won't reduce their quantity demanded due to an increase in price. If quantity demanded remains unchanged while prices rise, total revenue would rise

Explanation:

Elasticity of demand measures the responsiveness of quantity demanded to changes in price.

Elasticity of demand = percentage change in quantity demanded / percentage change in price

3% / 10% = 0.3

5% / 10% = 0.5

The percentage change in quantity demanded ranges from 3 to 5 % while the percentage change on price is 10%. Because the percentage change in price is greater than the range of percentage change in quantity demanded, the elasticity of demand would be less than 1.

When the coefficient of elasticity is less than 1, demand is inelastic.

Inelastic demand means that an increase in price has little or no effect on quantity demanded.

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